Question

Question 1 Marshall Pty Ltd started business at the beginning of the 2014 financial year, and use predetermined overhead rates based on normal capacity to apply overhead. Management would like a comparison with direct costing so as to be able to evaluate its variable costs more easily. The company annual record shows: Units Normal Capacity 95,000 Production 100,000 Sales 85,000 Budgeted Costs Fixed factory overhead 180,500 Variable factory overhead 342,000 Actual Costs Actual selling price per unit 15.00 Actual variable costs per unit - Direct material - Direct labour - Factory Overhead 4.00 - Selling and Administration Expenses 0.40 Actual fixed costs in total - Factory overhead 180,500 - Selling and Administrative expenses 80,000 2.50 0.90 Required: (a) Unit cost to value closing inventory under both Direct and Absorption Costing (b) Income Statement for year ended 30 June 2014 using Absorption Costing. (c) Income Statement for year ended 30 June 2014 using Direct Costing. (d) Reconcile the Net Profits derived under both methods. Q2. Aast teok 1 page Qg/110 Duider No. 03188 Author: WAIFS

Answer 1

a.Unit Cost of closing inventory

Absorption Costing:9.205 $ (see in B below)

Direct Costing:

Direct Material	2.5
Direct Labor	0.9
Factory Overhead	4.0
Selling and Admin	0.4
Total	7.8 $

b.

Income Statement as per Absorption Costing

Sales		1275000
COGS	9.205*85000	782425
Gross Profit		492575
Selling and Admin
Fixed	85000*0.4	34000
Variable		80000
Profit		378575

Computation of Cost per unit

Direct material	100000*2.5	250000
Direct Labor	100000*0.9	90000
Prime Cost		340000
Factory Overhead
Variable	4*100000	400000
Fixed		180500
Cost of Manufacturing		920500
Total Units		100000
So Cost per Unit		9.205

c.

Income Statement using Direct Costing

Sales	85000*15	1275000
Less: Variable Costs
Direct Material	2.5*85000	212500
Direct Labor	0.9*85000	76500
Factory Overhead	4*85000	340000
Selling and Admin	0.4*85000	34000
Contribution		612000
Less: fixed Costs
Factory Overhead	Given	180500
Selling and Admin		80000
Profit		351500

d.

Reconcilliation Statement

Profit as per Direct Costing		351500
Add:
Cost of Fixed factory Overhead pertaining to Closing inventory present in Units sold	(180500/100000)*15000	27075
Proftit as per Absorption costing		378575